Direct participation programs allow investors to benefit from cash flow and tax advantages associated with the issuing company. They are often used for real estate and alternative energy projects and can be structured as general or limited partnerships or S corporations. Recent tax law changes have reduced the benefits, but some tax breaks are still available.
A direct participation program is an investment option that allows investors to get involved in the cash flow and tax benefits associated with the company issuing the security. Sometimes referred to as a direct participation plan, this type of program was once considered a great tax haven for investors looking to form some type of partnership. However, tax law changes in recent years have reduced the benefits of using an direct participation program in order to obtain significant tax advantages in some situations.
For the most part, the direct participation program is a somewhat passive investment option. An investor who is involved with this type of program or plan is able to realize a return based on the amount of cash flow associated with the underlying investment that serves as the reason for creating the plan. Depending on the terms and conditions associated with the program, the investor may receive a fixed amount provided the monthly revenues exceed a certain amount or may qualify for a percentage of any net income generated by the underlying security. The investor does not have to do anything to benefit from this benefit.
It is not uncommon for a direct participation scheme to be set up in order to attract investors to projects such as real estate deals. As interest in alternative energy options has increased, the direct participation program model has also been used to connect with investors who see the potential in further developing and implementing products involving the exploitation of solar, energy wind power and biofuel production.
Investors who choose to participate in a direct participation program usually take steps to organize themselves in some way, in order to get the maximum benefit from the effort. Both general partnerships and limited partnerships are used to structure the program. In some cases, investors choose to go with an S corporation version of the sub-chapter. The choice of structure is usually influenced by the nature of the investment opportunity and the agreement among investors that a particular form of organization will bring the greatest benefit to investors. partner.
While new tax laws have downplayed the tax benefits of getting involved with a direct participation program, there are still some tax breaks available with this type of plan. If investors feel that the return on investment is sufficient when combined with maintaining the remaining available tax breaks, seriously considering such a program is likely to be a viable option.
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